Constructing a simple valuation method based on a value relevance model

Prior valuation studies have developed and improved valuation models. However, these models are often difficult to use, because estimating their various factors requires lots of skills and experience. Thus, this study aims to provide a simple valuation method for the listed firms based on value relevance research. Using the annual data of the listed firms in 87 countries, we present the usefulness of the basic value relevance model for international investment. After confirming that market value of equity can be explained by book value and actual net income, we demonstrate that the explanatory power of this model is as high as the model using forecasted or residual income. Considering the higher availability of actual net income, this result supports the usefulness of actual earnings. Next, we demonstrate that the basic value relevance model with actual net income is useful for forecasting future annual returns and obtaining higher portfolio returns. To reduce the practical difficulty of our method, we propose a simple procedure, which requires inputting only three pieces of the accounting information of the target firm (sales, net income, and book value of equity) to estimate its intrinsic value. This valuation method should contribute to the international investment decision-making especially for practitioners without enough experience of valuation